Wednesday, February 10, 2010

Recalls and Risk

At first glance, the current wave of Toyota recalls brought back memories of the Tylenol recall of 1982. During that recall, Tylenol's U.S. over-the-counter pain reliever market share quickly dropped from 35% to 8%. Based on its aggressive risk management, risk communication efforts, and repackaging response, Tylenol recovered in about a year. Some differences between its recall and the Toyota recalls are significant -- (1) the Tylenol recall was prompted by distinct episodes of intentional, criminal product tampering, (2) the cause and a solution (tamper-proof packaging) were quickly evident, and (3) the communications' proliferation and amplification of the Internet did not yet exist.

The Toyota problems largely stem from sudden acceleration allegations. Looking at readily available NHTSA data, it is apparent that sudden acceleration problems occur across manufacturers. The rates of complaints about Toyotas are, for examples, ten times higher than GMs and five times higher than Hondas and Nissans. (Interestingly, the rates of complaints are less than 40% more than Fords.)

Many factors may be involved in the sudden acceleration that led to the product recall -- manufacturer design problems, third-party component design problems, quality control, use of after-market accessories, software errors, poor regulatory response, poor corporate response/secrecy (see, for example, today's WSJ), poor dealer response, a potential trade-off between quality and growth, avoidance of litigation, hubris.

Given that this type of problem has occurred, what does a corporation do to survive and recover? What reasonable pre-planning could have helped avoid this? To what extent has this problem been exasperated by poor risk communications? To what extent, if any, do cultural differences between top management and the U.S. consumers contribute?

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